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Marginal revenue:
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change in revenue resulting from a one-unit increase in output
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Properties of a perfect competive Market
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1. Firms are price takers
2 Homogenous Products (identical products)
3. Free entry, Free exit
2 Homogenous Products (identical products)
3. Free entry, Free exit
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Perfect Elastic demand
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demand in which quantity drops to zero at the slightest increase in price
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Homeogeneous
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where firms produce identical, or nearly identical, product
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cooperative
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an association of businesses or people jointly owned and operated by members for mutual benefit.
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marginal cost.
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measures the additional cost of producing one additional unit of output, is the firm'.
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Economic Profit
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The difference between TR -TC
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Different forms of organizations
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Proprietorship- small unlimited liabilities
Partnership - eg. med group, law groups - gone unless transfer
Modern Corperation with limited liabilites
Partnership - eg. med group, law groups - gone unless transfer
Modern Corperation with limited liabilites
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production function
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Show the maximum output that can be produced from differnt combinations of inputs with a given technology
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short run
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period of time in which quantities of one or more production factors cannot be changes.
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Fixed Input
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production factor that cannot be varied
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marginal product of labor
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the additional output a firm produces as a result of hiring one more worker
ID by the slope of the tangent line to the total product curve
ID by the slope of the tangent line to the total product curve
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Long Run
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Amount Of time needed to make all production inputs variable
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Axiom of continuity
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More is better than less , eg cx prefer A+B over A
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Axiom of Transitivity
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If a>b and b>c, then a>c,
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Axiom of Completeness/ comparison
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Prefer one one the other / cx can rank goods in order
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utility Function
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U=U(x,Y) X and Y are quantities of Good
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Indifference Curve
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Negatively Sloped, Two curve for the same person cannot intersect
They are convex to origin
They are convex to origin
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When goods are perfect substitutes
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ICs are straight lines, MRS is constant
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When Good are compliments
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IC 90* angle, MRS is either zero or infinite
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When x is bag and y is a good product
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IC is positive sloped and convex, upwards
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diminishing marginal utility
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Utility falls as more of the Good is consumed
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ideal cost-of-living index
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Measure the cost increase occurrent utility in one period vs another
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Laspeyres Index
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Uses a constant basket of goods;
Can be biased to upward movement when old products are replaced by newer and more expensive products, higher quality products replacing lower quality and by consumers using substitute goods when those in the basket get expensive
Can be biased to upward movement when old products are replaced by newer and more expensive products, higher quality products replacing lower quality and by consumers using substitute goods when those in the basket get expensive
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Paasche Index
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Weights its basket based on current consumption
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homogenous of degree zero in price and income
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If price of all goods and income increase by the same percent the utility-maximizing choices remain the same
* demand remain the same but move up along price
budget line is the same
* demand remain the same but move up along price
budget line is the same
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normal goods (superior goods)
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products whose demand varies directly with money income
Demand cure shift in the direction of income
Demand cure shift in the direction of income
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inferior Good
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a good that consumers demand less of when their incomes increase
the demand curve shift in the opposite direction of income
Engel curves are positively sloped
the demand curve shift in the opposite direction of income
Engel curves are positively sloped
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Engel curve
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relationship between income and a quantity of Good
Engle Curves are negatively sloped 5
Engle Curves are negatively sloped 5
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subsitution Effect
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when consumers react to an increase in a good's price by consuming less of that good and more of other goods
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income effect
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the change in consumption resulting from a change in real income
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consumer surplus
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the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
graphically the area between the demand curve and the market price
graphically the area between the demand curve and the market price
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Network Externalities
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Person demand for a good depends on the demands of the good by others
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Positive Externalities
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Bandwagon effect buying a good because others are eg fashion, phones
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negative externality
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Snob. Effect _ a consumer wishes to exclusively own something or a unique good
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Short Run
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Period of time in which quantities of one or more production factors cannot be changes.
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Average product of labor
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calculated as the total output produced by a firm divided by the quantity of workers APl=Q/L
Measueres the productiivity of the firms workforce interms of how much each worker produces on average
Measueres the productiivity of the firms workforce interms of how much each worker produces on average
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diminishing marginal returns
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Decreasing satisfaction or usefulness as additional units of a product are acquired
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Average product is increasing...
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When marginal product is greater than average product
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Average product is decreasing ...
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When marginal product is less that average product
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Marginal and average products are equal when
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average product is neither rising or falling
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Marginal Rate of Technical Substitution
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the rate at which labor substitutes for capital without affecting output / While holding out put contant
MRTS = MPl/MPk
MRTS = MPl/MPk
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Returns to scale
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rate at which output increases as inputs are increased proportionately
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constant returns to scale
(CTRS)
(CTRS)
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Output Doubles when all inputs are doubled
A+b =1
A+b =1
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Increasing Returns to scale
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output more than doubles when all inputs are doubled
a+b <1
a+b <1
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decreasing returns to scale
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output less than doubles when all inputs are doubled
a+b >1
a+b >1
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Economic Rent
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The amount a firm is willing to pay for input minus the minimum necessary to obtain it
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economic cost
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cost to a firm of utilizing economic resources in production
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opportunity cost
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Cost associated with missed opportunities when the firms resources is not put to their best alternative use
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fixed costs
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Costs that do not vary with the quantity of output produced. Must be paid not matter what
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variable costs
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costs that vary with the quantity of output produced. Can be eliminated if output is zero or firm close temp
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Total Cost (TC)
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FC + VC
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sunk cost
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a cost that has already been committed and cannot be recovered
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constant cost industry
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an industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs
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increasing cost industry
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an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward
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decreasing cost industry
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An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs. curve down ward slope
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economic efficiency
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maximization of aggregate consumer and producer surplus ie (CS + PS)
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Economic Profit / Profit
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the difference between (total) revenue and (total) cost,
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marginal revenue
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the change in revenue resulting from a one-unit increase in output. Found by the slope of revenue curve.
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Marginal and average products ar equal when
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average product is neither rising or falling
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Production Function
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Q = F( L, K) Q is output and X's are input
This shows the maximum output that can be produced from different combinations of inputs with a given technology
This shows the maximum output that can be produced from different combinations of inputs with a given technology
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The law of Diminishing Marginal Return
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With a fixed input, and an increasing variable input, at some point the marginal product of the variable input must decline
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Diminishing marginal products
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The increment in output falls as more labor/ capital is used holding labor/capital constant
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The production Isoquant
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a function representing all possible combinations of factor inputs that can be used to produce a given level of output
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When is the MRTS constants
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When L and K are perfect substitutes MRTS is constant
MRTS= MP l/ MP k
MRTS= MP l/ MP k
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When is the MRTS zero or infinite
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When two variables are perfect complements
MRTS= MP l/ MP k
MRTS= MP l/ MP k
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